The Reserve Bank, a greater concern about inflationary pressures hinting at more interest rate rises, probably next year now. And yesterday they also predicted consumer prices could rise to 3 per cent annually. Is it prudent to spend $9 billion on election promises, $2.1 billion of that next year?

TREASURER:

I think so. The bottom line of the Budget that we are aiming for is a surplus and we believe that keeping the Budget in surplus and surpluses of around 1 per cent is a prudent and responsible position. Now, the Government, the Coalition Government has presided over 10 surplus Budgets and as long as we keep that Budget in surplus with decent savings then I think that is consistent with good monetary policy. Let me say, the Reserve Bank Bulletin which was released yesterday talked about inflation being a touch under 3 per cent next year and the year after which is within our band. A lot of people were actually predicting that its forecasts would be higher than that. My forecasts are 2¾ per cent so it looks as if the Reserve Bank is pretty much on the forecast that I have given.

BEAUMONT:

Are you running it too close to the line now, Treasurer? Is it too close now?

TREASURER:

Look when you have got an economy which is growing strongly and you have got unemployment at 33 year lows and it is down around 4 per cent now, then you would expect there would be more pressure on inflation. There are other things that are putting pressure on inflation: world record oil prices now US $100 a barrel, drought, which is putting pressure on food. That is all adding to the difficult management task which lies ahead in the Australian economy. But what have we done? Ten surplus Budgets, we have eliminated all of Labor's debt, we are saving $8 ½ billion in interest payments on Labor's debt now, we have established the Future Fund, we have built the Higher Education Endowment Fund, we have improved the competitiveness in the Australian economy and as long as we have good, strong experienced economic management we can deal with this situation. In fact, we want to deal with a situation where unemployment is low. That is the object of economic policy.

BEAUMONT:

So you are saying, the economic storm clouds are gathering on the horizon - environmental; world-wide, you are saying you are the blokes to do this now, are you...

TREASURER:

Yes.

BEAUMONT:

...the blokes to run it?

TREASURER:

Yes. The storm clouds are gathering. Let's go through them. US $100 a barrel for oil. Now, when I was first Treasurer back in 1997-98, the oil price was $11 a barrel. It is now US $100 a barrel. That is ten times. And most of our oil which is used for the petrol pump in Australia is imported, the majority of it is. You have got the US sub-prime collapse going on where billions, tens of billions, hundreds of billions have been lost in defaults in the United States and the US economy turning down. We have got a one in 100 year drought going on in this country and we have strong terms of trade led by mining. Now this is a pretty heady cocktail and it will take considerable management and my point is you wouldn't want to risk it on an inexperienced team with bad policy because it is your job, your mortgage, your home.

BEAUMONT:

Have you copied the Labor policy particularly on the rebates to primary and high school kids? Is that just a direct copy of their policy? You are saying $400 for each kid at primary school and up to $800 a year for high school kids. Is that just a straight out copy of Labor?

TREASURER:

No because there is a critical difference here. What Labor said is they would rebate you for buying laptops and for internet connections. Now, how many laptops can you buy one child through a 12 year schooling career? I don't believe many parents at all will actually qualify for that, particularly the primary school kids. How many parents buy their kids in grade one or grade two a laptop? We are not just rebating laptop and internet connections, we are going to rebate expenditure on fees, voluntary contributions which the government schools quite regularly charge, school excursions, uniforms, all of those costs. And that will go a long way at helping parents with the cost of education.

BEAUMONT:

How will it work? It is a tax rebate, (inaudible)...

TREASURER:

Yes.

BEAUMONT:

...what are the mechanics of it?

TREASURER:

Well what will happen is that when you do your tax return you will state how much you spent and you will get a 40 per cent rebate of that cost up to a maximum of $1,000 of costs for a primary school child - so that is 40 per cent of $1,000 - $400, or $2,000 for a secondary - 40 per cent of $2,000 which is $800. So all eligible expenditure for each child each year. So if you are in a school that charges fees you will get a rebate. Government schools quite commonly these days have voluntary contributions, you pay one of those voluntary contributions, school excursions, books, uniforms, all of those matters. Labor said they would rebate you for laptops and internet connections. Well we will rebate laptops too but you wouldn't get round to spending $1500 a year on a laptop. You know, you might buy one for your child when they start secondary school in the hope that it would last, you wouldn't be buying one a year.

BEAUMONT:

If you have some questions for the Treasurer, particularly about the rebates for school-aged children you might like to give a call this morning - 92211882 - we will take some calls in just a moment. One of the other announcements yesterday Treasurer, was about the housing affordability for first-time home buyers, particularly in terms of parents, grand-parents, friends, loved ones putting into a bank account that has some tax concessions for first home buyers, for bank accounts. Can I ask you about the mechanics of that as well?

TREASURER:

Sure. The idea is that all young people will be able to set up a tax exempt savings account. And somebody can pay $1,000 a year into that tax exempt savings account then they will get a tax deduction. So if you have a child, set up a tax exempt saving account in the child's name, you can put $1,000 in and you will get a tax deduction. It is theirs, it can't be touched by them until they are over 18, once they are over 18 they can draw it down for the purpose of buying a home. And not only will the contribution that you put in up to $1,000 a year get you a tax deduction, but the interest in that account will be tax free. So the idea is that all young people can have one of these accounts set up in their name or in fact they can set it up in their name...

BEAUMONT:

Who is going to administer that, the banks or...?

TREASURER:

...banks and financial institutions will offer these accounts but it will be subject to them complying with these regulations.

BEAUMONT:

So they are across it, they are with you on this one...

TREASURER:

I think they will be very happy to set them up because from a bank's point of view this will give them the opportunity to get more savings and at the end of it when you are 18 or older and you bring it out of course, here you have a deposit for your home which the financial institutions will also like. So I think it is actually a very, it is going to help young people save for a home and that is a great thing. But even more importantly, it is a very, very good long-term savings vehicle for private savings in Australia.

BEAUMONT:

Let's take some calls, I am talking to Treasurer Peter Costello. He is with us up until 9 o'clock today if you would like to call in. 92211882. Robert from Annandale, good morning to you.

CALLER:

Good morning. Treasurer, what do, (inaudible), I am 79 years of age, still working, I can't get superannuation, I couldn't take advantage of the huge tax benefit that (inaudible) on the 30th of June. Can you tell me what situation I am in?

TREASURER:

Well if you have money in superannuation and you do retire when you take it out of your superannuation fund, you like everybody else of course would get it tax free. But of course, in relation to older Australians there were limits on contributions into superannuation and we have recently increased it. The limit is not quite 79, you are quite right about that but over the years we have increased it and we have made that better for older Australians and we continue to have that under review.

BEAUMONT:

So Robert, you haven't got a superannuation nest egg?

CALLER:

No, I retired when I was 64 and I came back into the workforce and I didn't have superannuation, I am self-employed and you know, I just find it terrible that people, friends of mine you know, are getting a huge tax benefit, I am still paying the full rate of taxation, the maximum rate of taxation and get no benefit whatsoever. There is nothing for me at all in anything that the Coalition has put up.

TREASURER:

Well, let me say if you are in the workforce and paying full tax, we have announced a tax plan which is going to cut tax for all Australians and we have a particular tax offset for senior Australians over 65. Part of our plan is to cut tax for people who are in the workforce by raising thresholds and cutting rates. And that was the plan that I announced on the first day of the election campaign to very, very directly help people who are in the workforce.

BEAUMONT:

Are there many people like Robert who are in between eras if you like, in superannuation regimes and tax regimes?

TREASURER:

Look there would be a lot of people who suppose they started their working career in the ‘50s and the ‘60s who wouldn't have had superannuation, yes there would be. And for most of those people when they retire, they would rely on the age pension. And you will recall in the course of this election campaign we have announced improved benefits on the age pension, including a $500 annual allowance to help them with utilities. But with these tax changes you know, we have made superannuation much more attractive. People who had gone through the system before these changes have occurred and Robert is quite right, won't get the same benefit as people who are coming through the system now. But that is really because they didn't have the opportunity of superannuation as far back as the ‘50s and the ‘60s. The only way you can help people is to either increase the age pension which we are doing or to cut tax which we are also doing.

I just quickly wanted to ask in regards to the school rebate, how is going to work with the school year and the tax year running in different cycles? Are we going to be able to claim on the 07-08 tax return or will we have to wait until the 08-09 tax return?

TREASURER:

Oh no, you will be able to claim in respect of the 07-08 and the first rebates will be paid in 08-09.

CALLER:

Obviously there is only going to be six months of the school year to go from January up until the end of June...

TREASURER:

Sure.

CALLER:

...are we going to be able to claim the full benefit or only half benefit for the half year?

TREASURER:

You would be able to claim the expenditures that you had from 1 January...

CALLER:

Yep.

TREASURER:

...there will be some people by the way, who in the six month period will actually hit the limits but it is to apply from 1 January 08, the beginning of school year next year.

CALLER:

Okay, excellent. Thank you very much.

TREASURER:

Thank you.

BEAUMONT:

Thanks Andrew. Good on you. Steve from (inaudible), good morning to you.

CALLER:

Good morning Simon. Good morning Mr Costello, how are you?

TREASURER:

I am not too bad, thanks Steve.

CALLER:

I hope you don't yawn if I sound a bit boring.

TREASURER:

You wouldn't see it if I did, Steve.

CALLER:

Mr Costello, you were mentioning before about our drought which is causing some of our inflation and all of that problem.

TREASURER:

Yes.

CALLER:

Well, we have got a lot of money this country. We are getting smarter and richer but I would like to know why doesn't the Federal Government put back into Western Australia a bit more into our roads and also, you know we have a drought problem all over this nation and the planet is heating up. We have got that much water up north, why can't the Federal Government help us bring the water down? I know it is big money but you don't put a price on water. If you go to turn your tap on one day and no water comes out, how much are you going to pay for a litre? Now if we brought this water down and opened up a big food bowl up north and create new farms and everything like that to get our country growing, why can't our politicians see this?

TREASURER:

Look, I think it is a good point. There are many ways of improving the water which is available for our big cities. One of course is desalination. I know Western Australia is going down that path. Another is to make sure that we recycle water better. Another option that has been discussed is to bring water down from the north and you might even recall that was a big issue in one of the state elections over here not so long ago, the people of Western Australia had the chance to vote in relation to that. Now, all of these are valid alternatives, the only thing that governs whether you go with recycling, whether you go with desalination, whether you go with piping really is the cost. The reality is if you can produce water from desalination at a lower price than you can produce it from piping water down from the north, you'll go with desalination. These are just, these are economic issues, basically, when you look at all of the projects. I think as water becomes scarcer people are going to look much more at these piping proposals. The only thing I'm not sure of is whether desalination with improved technology will still be a more competitive option.

BEAUMONT:

Thank you for your call, Steve. A question of economics on water management from the Treasurer there. Ten minutes to nine, you're listening to the morning program. Interesting, some interesting figures today, Mr Costello, in the Australian Financial Review. The average annual salary packages of a CEO, this is the 300 largest ASX-listed companies, has gone up to $2.56 million. It was $1.99million the year before. Times are good but the median salary Australia-wide is round about $57,000 annually. The rich are getting richer under the Coalition. Do you have any comment on the level of CEOs pays in the top ASX-listed companies in Australia?

TREASURER:

We introduced a law which required the directors to put their remuneration policies to the shareholders. The idea was that the shareholders, who after all own the company, would have the chance to vote on those policies. Now I think directors ought to listen to their shareholders on this. If the shareholders are happy, well the directors can go ahead. If the shareholders aren't happy, I think the directors ought to think again. It came up recently, you'll recall, in relation to Telstra where the Telstra remuneration package was put to the Telstra shareholders who rejected it. And I think the Telstra Directors should think pretty carefully now about the level of remuneration. If your shareholders don't like your remuneration policy as a director, you'd better listen to them.

BEAUMONT:

92211882, the Treasurer is here until 9 o'clock this morning. Joe, from Northbridge, good morning.

CALLER:

Good morning, Mr Costello and Simon. Look my question is, I'm working two to three jobs at the moment and the obvious reason being is, well the first is the cost of living, just to get by. And there is an interesting thing in the French election recently where that new French Conservative Government sort of came in anyone working over 38 hours a week won't actually have to pay tax on overtime. And I'm just wondering if you there had considered that sort of system, especially in light of Work Choices and all that. And I don't want to get into an argument about that, but (inaudible) situation since that was introduced penalty rates have just been (inaudible) the type of work that I've been in and this Christmas we, our, my main factory where I work is is closing down for three weeks. I've been there nine months and there is no holiday pay or anything outside that. So given that the Government, in my view, is partly responsible for that, why can't you cut tax for low income workers who are prepared to throw in 60 hours a week doing overtime?

TREASURER:

Well, we can and we should cut tax for low income earners...

CALLER:

I'm actually just specifically talking about abolishing tax for people who are prepared to work over 38 hours a week.

BEAUMONT:

So, paying tax on overtime, Joe.

CALLER:

That's it, mate.

TREASURER:

Well, there's a lot of complications in there. The way that the tax system works is that you get to an end of a financial year and you declare your income. You don't actually declare how much of it came from ordinary time, how much of it came from overtime and how much of it came from penalty rates...

CALLER:

But if the French can do it, surely you can.

TREASURER:

Well, I wouldn't hold the French out as an example of tax. Tax is a lot higher in France than it is here. I can assure you of that. Much, much higher than it is in Australia.

CALLER:

That's my point, Mr Costello. The French are obviously, I mean surely...

BEAUMONT:

Joe, are you doing overtime at second and third jobs? Or at the same company?

TREASURER:

There's a lot of people who think oh, well I'm doing overtime, that's taxed at a higher rate. It's not. All income is taxed at the same rate and our plan is for low income earners, the first $20,000 won't be taxed. And then we have a plan to have another rate at 15 cents, and then we have a plan to have another rate at 30 cents. So it doesn't matter if it comes from ordinary hours or penalty hours or overtime hours, you know, the tax just works on the income. If you tried to separate which part of the income came from ordinary hours, or penalty rates, you would get a very complicated system. But the point that is being made here, which I agree with, which is we should be cutting tax for all work whether it is ordinary, penalty, overtime or whatever. That's what our tax plan is all about.

BEAUMONT:

Just finally, Treasurer, if we can, on the matter of the leadership of your Party, MrHoward sat there in that chair where you're sitting now and he's told me a number of times now that you two fellas haven't sat down and discussed the handover date. Is that right? Have you at no point in time said if elected this will be day and we'll have a meeting around this time and we'll talk about handing over the reins ...

TREASURER:

No, we don't talk about those things. What we're talking about at the moment is how to win the election and the policies that are required to win the election and the importance of economic management.

BEAUMONT:

Mr Howard has announced that there will be a handover so surely, implicit in that, there must be a handover date.

TREASURER:

No, no he said that, well, yes sometime before the election after this one. This is the election for 2007. The election after this one is 2010 and what he's said is sometime before the 2010 election because he's said that he's not going to contest the 2010 election, so at some point before the 2010 election, which I would intend to contest if I'm successful in the 2007 election, I don't take anything for granted.

BEAUMONT:

There wouldn't be too many workplaces of people listening today where the boss is saying to the 2IC, at some stage you're going to take over and ....

TREASURER:

I don't know. I reckon there would be a lot of companies where the boss would say, look, you know, I've got a succession plan in place:- ‘the company has to have assured leadership, sometime before 2010 I'll be announcing my retirement'. I reckon there would be a lot of companies in precisely that situation. I think most companies in Australia, particularly the big companies would be in that situation that, you know, we've got our leadership succession lined up and at some point before, you know, a date in the future, there will be a transition. I think companies do work that way.

BEAUMONT:

All right. Thanks for you time this morning - we've run out of that. We'll see you, we might not see you again before November 24, will we?

TREASURER:

Probably not before the 24th of November, no that's Saturday week. Probably my last visit before the election.